Case Study – Analyzing an Investment Opportunity

The purpose of this case study is to illustrate the steps involved in analyzing a residential investment opportunity. It may not cover all aspects of the investment analysis but it is very comprehensive. Where applicable, there are links to more explanation of the topics throughout this post. The objective is to show how one, systematically and objectively, can quantify the…

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Investment Decision Points

Decision Points Unlike purchasing a property as a home, where the buyers are emotionally involved, the purchase of an investment property mostly is (should be) a business decision. Below are some of the decision points: Initial cash needed for down payment, closing costs, repairs, etc Cash flows (before and after tax) Tax impact (liability or savings) Return on investment Financing,…

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Quantifying After-Tax Cash-Flow (ATCF)

The methodology behind figuring out the After-Tax cash flow (ATCF) is to take your Before-Tax Cash-Flow (BTCF) and add to/subtract from it your tax savings/ tax liability. Here are the steps: Taxable Income = Net Operating Income (NOI) – Annual Interest Payments – Cost Recovery See below for Cost Recovery (a.k.a. depreciation) calculation. Tax Impact = Taxable Income X Investor’s…

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Using the Cap Rate

The Capitalization Rate is defined as CR=NOI/Price. Cap Rate is often used to valuate and compare investment opportunities. It is a simple way to do so. It takes into account expenses but not the financing, appreciation, tax impact, etc. An Example: There are 2 four-plex buildings. Building A with an annual income (NOI) of $30,000, priced at $335,000 yielding a…

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Calculating Net Operation Income and Cash Flows

Net Operating Income (NOI) , as one put it, is the center of the universe. Practically all valuations are based on NOI. It is the Net income from the property as if there are no Mortgages. A couple of definitions first: Gross Scheduled Income (GSI) is the income expected from the rental property assuming fully rented + any other income,…

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Tips for Successful Real Estate Investments

Pay careful attention to 3 key areas Income Expenses Financing Run the numbers BEFORE buying Cash-flow analysis before and after taxes Tax Savings or Liability Project the cash-flow for the holding period Disposition plan and overall investment performance over the holding period FMRR – Financial Management Rate of Return is a system to capture a the points listed above. I…

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